INFORMAL EMPLOYMENT IN THE TRANSITIONAL ECONOMY OF KAZAKHSTAN.

• Author: Tatibekov, Bolat L.

INTRODUCTION

Before the end of the Cold War, Kazakhstan was a place for forced exile (Tatibekov, Fatehi, & Derakhshan, 2008). After the Soviet Union's dissolution, the country shifted its course and started to attract many workers. The attraction was mainly due to the economic reforms and the development of oil reserves. These two factors contributed to healthy economic growth. In 2000-2007, the economy grew by 10% (Economist, March 24, 2007). This trend led to an increase in the number of legal and illegal migrants, many of whom gravitated toward the shadow or informal economy. In 2008, there were about 400,000 illegal workers among a population of 15.2 million, creating a challenge for the government. To address this problem, the government tried to lure illegal workers out of the shadow economy. In 2006, the Ministry of Interior launched a pilot program through which 160,000 migrants were legalized (BBC News, July 30, 2006).

In 1991, after the Soviet Union's collapse, similar to other former Soviet Republics, Kazakhstan started to transform its planned economic system to a market one. Different reforms were carried out. One of the adverse outcomes of the transformation was the shadow economy. Consequently, informal employment emerged (Karrar, 2019). The passage of formal legislation "On Labor" in 1999, which was based on a similar law leftover from the Soviet Union in 1972, and the existence of legal loopholes did not create decent labor relations between employers and employees. Also, low living standards, a high unemployment rate, lack of an efficient training system, and retraining of the unemployed were among the most significant causes of extensive informal employment. To maintain their jobs, workers agreed to work without getting paid on time for their labor, hoping to get paid eventually. Employees had to wait for months and sometimes years before they could get paid for their work. Such labor relations violated different normative acts on protecting employees' labor rights and those of their families. Informal employment among young employees in the form of a trial period for 1-2 months was quite common. In many cases, young employees who worked for 2-3 months, and sometimes more, were fired under the pretext that their performance during a trial period was not satisfactory.

Various reasons are the root cause of informal employment. According to Abdih and Medina (2013, 1), "...a burdensome tax system, rigid labor market, low institutional quality, and excessive regulation in financial and product markets are determinant factors in explaining the size of the informal economy" in Caucasus and Central Asia. In the 1990s, the shadow economy produced nearly a third part of the country's GDP during those years. Table 1 contains statistics on these issues.

During this period, except for Kyrgyzstan, the informal economy's share in Kazakhstan was one of the highest compared with other transitional economies. The average employment in the shadow economy in transitional countries was estimated at 23.8% of the GDP, while in Kazakhstan it amounted to 32.5% of the country's GDP.

Since the beginning of the new millennium, the economy of the country has started developing rapidly. The country emerged from the deep economic crisis of the 90s, and the infrastructure of its market economy developed further. Consequently, the share of the shadow economy as a percentage of the GDP decreased. In 2006, the shadow economy's share as a percentage of GDP amounted to 17.7%, which was slightly lower than the average (19.0%) for the other transitional economies (Table 2).

There were/are many problems and issues in estimating the volume of the shadow economy and informal employment. It is quite a complicated task. We calculate the volume of the shadow economy in Kazakhstan conventionally. The most popular method of estimating the share of a "parallel economy" is a statistical method that uses national accounts (SNA). There are many different methods and approaches in defining the shadow economy, which is impossible to account for and which is mainly linked with undeclared activities ("shadow economy," "black market," "parallel economy," etc.). Since the present study is not aimed at researching and classifying the abovementioned economic category, various word combinations, such as "shadow economy," "black market," "parallel economy" will be used in this paper as synonymous words.

According to SNA, significant invisible (shadow) economy segments are informal, hidden, and illicit activities and employment. The following are various approaches and definitions:

* Informal activity is typically the employment of individuals not registered by the statistical and taxation agencies as entities producing goods and services.

* Invisible activity is the work of officially registered enterprises that provide products and services that hide their profits from statistical accounts to avoid paying taxes.

* Illicit activity is where goods and services forbidden by law are produced (drugs, weapons, prostitution, human trafficking, etc.). We consider in this category the manufacturing of products and services without permission or license.

In Kazakhstan, similarly to other countries, estimating the share of illicit activity related to criminal activities is not included in the total volume of GDP. Such activities are mainly about redistribution of material, financial, and other benefits from one sphere to another. In many instances, it involves deception, coercion, and violence.

Figure 1 shows GDP share attributed to the informal activities, which were not registered by statistics or taxation agencies, and concealed activities, which were statistically registered but avoided tax deductions.

We noted earlier that an old code "On Labor," which was adopted in 1972 by the Supreme Soviet of the Kazakhstan Socialist Republic, was utilized. On December 10, 1999, a new statute # 494-1 "On Labor in the Republic of Kazakhstan" was adopted. The new statute instigated market regulations of labor relations in the Republic of Kazakhstan. The law vested employers with significant rights. Thus, it developed and encouraged entrepreneurial activities.

Figure 1 Share of invisible economy in GDP, % Informal economy 14.2 12.8 11.6 11.4 11.5 12.4 12.1 10.4 Concealed economy 9.7 9.8 10 9.3 8.7 7.4 7.5 9.1 Sources: 1. National Accounts of the Republic of Kazakhstan, 2004-2008. Statistical Compendium, Ed.: Smailov, B., Astana, 2010, p. 126. 2. National Accounts of the Republic of Kazakhstan, 2001-2005. Statistical compendium, 2007. Ed.: Shokamanov, Y.K., Almaty, 2007. P. 116. Note: Table made from bar graph. The vital role of the trade unions in regulating labor relations was recognized and implemented in the law "On Social Partnership in the Republic of Kazakhstan" adopted on December 18, 2000.

On December 30, 1998, and later on January 23, 2001, Kazakhstan adopted the new law called "On Employment." Thus, during the first decade of its sovereignty, Kazakhstan lacked a legal basis for the labor market and employment. These legislative gaps were filled in the second decade.

However, the statutes in the sphere of socio-labor relations and employment adopted at the beginning of the new millennium did not fully reflect the Republic of Kazakhstan's socio-economic, cultural, and geographical peculiarities. In some instances, the statutes even encouraged the development of informal employment. To illustrate, restructuring government agencies based on the law "On Employment of Population" adopted on December 30, 1998, and January 23, 2001, was among the significant causes of informal employment growth in some country regions. Quite often, in the remote and economically undeveloped regions, some people are informally working far away from their residences. In this case, the government employment agencies did not have relocation programs, which caused a rise in informal employment in Kazakhstan.

One of the major causes of informal employment in Kazakhstan was/is distrust of the government agencies, which was ingrained and leftover from the Soviet times and grew further during the economic crisis of the 90s till the present time. The Soviet economy, with its harsh system of criminal (not administrative) punishment for profits that exceed the state-imposed limits, gave way to acute rejection and phobias among the population towards different statistical and taxation agencies. Thus, people fearing criminal punishment concealed any activity that was unregistered income, regardless of its size.

Another major cause of informal employment in Kazakhstan during the transitional period was low living standards. In 2001, the income of almost half of the population (46.7%) of the country was lower than the subsistence minimum. Due to economic growth, the indicator decreased and made up 8.2% in 2009. Despite the significant decrease, the average monthly income of the population with the lowest income was 8,772 tenges in 2009. In contrast, the average salary of the people with a higher income was 46,789 tenges. Many low-income people, to improve their lives...